You are here

Cyprus, Troika agree bank recapitalisation

The Troika representing the international lenders has concluded talks with the central bank of Cyprus on the recapitalisation of the island's banks and on reforms in the wider monetary sector, the central bank said yesterday (18 November).

Cyprus has been holding talks with the Troika – the European Union, the European Central Bank and the International Monetary Fund - to get financial aid after its banks were battered by its exposure to debt-crippled Greece.

The amount of the banks' recapitalisation will be determined by an interim report expected to be submitted by investment company PIMCO in early December, central bank spokeswoman Aliki Stylianou told Reuters.

The central bank said that the initial agreement will help restore the Cypriot banking sector's credibility.

"The recapitalisation of the monetary sector and the ensuing increase in liquidity will lead, on the one hand, to interest rate reduction and on the other, fulfil the economy's monetary needs, developments that will positively affect growth," the central bank said in a statement.

Signalling some progress in the talks, government and central bank officials told Reuters on Saturday that the troika had also agreed on a key capital ratio for banks and a system for the sector's supervision.

Both commercial banks and cooperatives would be overseen by the Central Bank, finance ministry and central bank officials said. Cooperatives were previously overseen by a separate authority.

They also set a core Tier 1 ratio - a measure of financial strength - of 9% by the end of 2013 for banks, which could then rise to 10% in 2014.

The two sides remain at odds over the lenders' demands for privatising assets and cutting wages and pensions.

The size of the potential bailout - speculated to be anything between €11 billion and €16 billion and the bulk of it for banks - will be huge in proportion to the €17.9 billion economy, the third smallest in the eurozone.

Background

Cyprus, which joined the EU in 2004 and became a eurozone member in 2008, holds the EU presidency through 31 December.

The entire island of Cyprus is officially EU territory, but the country is divided. Turkey, an EU candidate, doesn’t recognise the Republic of Cyprus and has occupied the northern part of the island since 1974.

The Turkish intervention was a response to a coup d’état on 15 July 1974 by the Greek military junta and a move to unite the island with Greece. On 20 July the Turkish army invaded the island with 30,000 people. Three days later, a cease-fire was agreed and by then 37% of the island had been taken over by the Turks and 180,000 Greek-Cypriots had been evicted from their homes in the north.

Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system.